Tuesday, July 21, 2015

Treasury Requests Information About Online Marketplace Lending

American Banker called 2014 a "Gold Rush" year for online marketplace lending, and named it the innovation of the year. Online lenders provide a host of different credit products from merchant cash advance services, cash flow-based loans, and term loans. Other online companies provide loan matching services for potential borrowers, e.g., Biz2Credit, and Fundera.

Yesterday the Treasury Department published a request for information about online marketplace lending. Fed. Reg. Vol. 80, No. 138, July 20, 2015, 42866. Treasury describes "online marketplace lending" as "the segment of the financial services industry that uses investment capital and data-driven online platforms to lend directly or indirectly to small businesses and consumers." Treasury wants information about the business models and products offered by online marketplace lenders, the potential for this type of lending to "expand access to credit to historically underserved market segments," and "how the financial regulatory framework should evolve to support the safe growth of this industry." It recognizes three categories of lenders within this industry segment: 1) balance sheet lenders that hold credit risk and are funded by hedge fund or family office investments; 2) online platforms (peer to peer) that sell securities to raise capital to enable third parties to fund borrowers, but do not retain credit risk; and 3) bank affiliated online lenders funded by a commercial bank, and that directly originate loans and assume credit risk.

How this market will be regulated remains up in the air. Treasury noted that the CFPB has "broad authority governing standards that may apply to a variety of consumer loans issued through this segment." In March 2015, the CFPB announced it was considering proposing rules governing payday, vehicle title, deposit advance and certain other high cost installment and open-end loans (specifically loans with a term of 45 days or less and an APR greater than 36%, or lower than 36% if the loan provides for repayment from the borrower's deposit account or paycheck or creates a PMSI in a vehicle). Treasury noted that potential CFPB rules are "outside the scope" of its request for information and that Treasury is interested in information on online marketplace lenders not covered in the CFPB's proposed rules. Treasury's RFI notes that the "framework" by which CFPB will regulate consumer loans issued through an online marketplace lender "is currently under discussion" and "the CFPB may ultimately change the scope of any proposed or final CFPB regulation."